Mortgage defaults to rise as housing market slows

Sacramento Business Journal - 10:31 AM PST Monday

Declining sales, slower appreciation and higher interest rates will increase mortgage defaults later this year and into 2007, according to a distressed property investment advisory firm in Sacramento.

ForeclosureS.com President Alexis McGee said several one-time fast-rising housing markets are slowing down, especially in the West, and the residential real estate industry is returning to normal.

For example, home prices in Las Vegas and Phoenix markets, two of the nation's best-performing regions in recent years, are dropping, McGee said. And home prices in San Diego and the San Francisco Bay area are declining.

"In San Diego, for example, year-over-year price appreciation has dropped to 6.4%, and sales volume is down throughout our Southland," said McGee, referring to the Southern California market. "There is no crash coming because the excess inventory just isn't there. We're just getting back to normal."

Sales of existing homes last month in the Sacramento area dropped more than 30 percent compared to February 2005, but was up 1.9 percent from January, according to a report last week by the California Association of Realtors. The area's median price jumped 1.6 percent from January to $379,240 -- a 7.8 percent increase from February 2005.

ForeclosureS.com has been tracking housing markets, publishing foreclosure property information since 1992. The company expanded its listing services nationwide in late 2005.

Vegas condos become a construction gamble

Developers feel the heat as material costs rise and the skilled work force declines. Several high-rise projects have stalled.
By Kathleen Hennessey
The Associated Press

LAS VEGAS -- The glossy brochures promised rooftop gardens and posh European spas. Private basketball courts and butler service. The Las Vegas Strip and billions of dollars of hedonism just past your uniformed doorman.

Such is the stuff of high-rise living in the imagined vertical Las Vegas -- billed as the next sexy center of condominium living, a 21st century Manhattan or Miami, and an antidote to the sprawl plaguing lesser Western cities.

But developers' lofty dreams have met with some not-so-sexy realities -- the cost of cement and copper pipes, a shortage of skilled labor and contractors, competition from deep-pocketed casinos.

By most accounts, the skyrocketing costs of materials and labor have toppled some high-profile luxury condominium projects, turning the market skittish. At least six projects have publicly folded or stalled in a little more than a year, a fraction of the more than 100 once proposed, but enough to make some real estate watchers declare a bust to the boom.

Many in the Las Vegas condo market describe the situation as more of a breather. Seventeen high-rise condominium projects are under construction, they note. Although about half are filled with a time-share hybrid called the condo-hotel, the others are filled with residential units that are 90 percent sold, real estate analyst Richard Lee said.

"What we're having here isn't a demand constraint," he said of the failed projects. "It's a situation that nobody predicted. The No. 1 problem is construction costs and lack of skilled labor."

The price of steel, diesel fuel and concrete, along with such materials as pipes and wiring, has driven up the costs of building a high-rise tower, said Ken Simonson, chief economist for the Associated General Contractors of America.

The cost of a cubic yard of concrete rose from 10 percent to 15 percent last year and will see a similar increase in 2006, he said. The average cost for diesel fuel used in construction trucks is up 36 cents a gallon from last year. The cost of gypsum, the main ingredient in wall board, rose 42 percent since 2004, and copper used in wiring and fixtures rose about 70 percent in two years, Simonson said.

"We'd have to go back to the '70s to see prices that were rising so rapidly," he said. ."

At the ground level, it means the estimated 25,000 cubic yards of concrete needed for a 15-story tower costs $625,000 more today than it did two years ago.

In the case of Related Las Vegas' canceled "Icon Las Vegas" towers, a highly anticipated collaboration of two experienced developers, those prices were locked in when the units were sold. While a lawsuit over views stalled construction, building costs nearly doubled and ate into potential profit, said Related Las Vegas President Marty Burger when he scrapped the project in January.

Even one of the most successful high-rise developers in Las Vegas, South Florida-based Turnberry Associates, has had to absorb costs, although the company got into the market before land and construction costs took off, said John Riordan, vice president of sales.

But materials are only part of the hurdle, Riordan said. "It's little things -- the cost of an electrician," he said, explaining Turnberry's choice to use union workers to "add to the quality."

Plumbers, electricians and ironworkers are hot commodities for union and nonunion jobs. Subcontractors say they've held back from bidding on projects for fear of not getting the labor. Their biggest dilemma isn't winning the bid, but staffing the bids they win.

But developers say it's the general contractors and subcontractors who reap the benefits of the shortage. With more work than they can handle, contractors can name their price and be choosey.

Of the few capable of doing the work required for a high-rise, many are tied up on the massive and continual casino expansion projects on The Strip.

Real estate continues to cool

By Noelle Knox, USA TODAY
After five adrenaline-pumping years of real estate sales, 2006 is already fulfilling predictions of a weaker market.

Sales of existing homes fell in January for the fifth month in a row, the National Association of Realtors (NAR) said Tuesday. The same month, new-home sales slid 5%, the government said Monday. Builders are seeing more orders canceled. Meanwhile, the number of homeowners who are late paying their mortgages has been creeping up. (Related: Home loan applications fall again)

Even so, prices are expected to rise about 5% this year despite the cooler market.

"January's weak existing- and new-home sales numbers are the strongest evidence yet that after five remarkable, record-setting years, the housing market is in decline," says Patrick Newport, the U.S. economist for Global Insight.

The drop in home sales defied unseasonably warm weather and cash and give-away incentives from builders that had raised hopes for a brighter showing.

"Imagine if the weather had been terrible," said Phillip Neuhart, economic analyst for Wachovia.

No one needs to tell that to Fran Floyd. She took her Houston townhome off the market Saturday after nearly six months — even though she was willing to sell it for $3,400 less than she paid in 2002.

"It's just sad," said Floyd, 81. "I've got to sell. I don't know what I'm going to do. What I'm thinking about and praying about is renting it for a year, hoping the real estate market gets better."

Unfortunately for her, the NAR projects a 5% decline in existing-home sales this year, to what would still be historically high levels. Home sales have been a huge engine for the economy as buyers spend to refurbish existing homes and sellers spend their proceeds on new homes or consumer goods.

In January, existing-home sales dipped 2.8%, to a seasonally adjusted pace of 6.56 million, down 5.2% from January last year. At the same time, the number of single-family homes for sale rose to the highest since 1986 — and 34% higher than a year ago, according to Insight Economics. That's a sign would-be buyers aren't so quick now to take the plunge.

"We've just got tons of inventory," and prices are coming down in Grand Rapids, Mich., said Pat Vredevoogd of AJS Realty.

One in five builders said they are seeing more cancellations of new-home orders than they did six months ago, according to the National Association of Home Builders, with 4% saying the problem is significant. To entice home shoppers, many builders are offering free TVs, swimming pools, landscaping and other incentives.

That's good news for buyers. But it's bad news for sellers such as Kent Anderson. Kimball Hill, the developer of his Las Vegas community, is now offering home buyers so many incentives — including free granite countertops and stainless steel kitchen appliances — that Anderson had to cut his asking price on the home he bought from Kimball Hill less than a year ago.

"As builders close out a community, those last homes are pure profit" for them, says Bruce Hiatt, Anderson's Realtor. "It really changes the comparable sales in the area."

Regionally, the only bright spot in January was in the South. Sales there rose 2.6% from December's pace. Home sales suffered most in the Northeast, falling 10%. That was followed by a 7.7% drop in the Midwest and a 3.5% dip in the West. January's declines are even sharper when compared with January of last year.

One key reason fewer people are buying: They can't afford to. The median price — half cost more, half less — was unchanged from December at $211,000 but was 11.6% higher than in January 2005.

It's clear that some homeowners are having trouble paying their mortgages. The number of homeowners who are 90 days or more behind on their primary mortgages rose to 3.6% in December, up from 3% last March, according to Loan Performance.

For subprime borrowers — those with impaired credit who carry higher-interest loans — the number of delinquent loans has jumped to nearly 10%.